Tobacco stocks, particularly those based in the United States, have long been under pressure. Since the Surgeon General first warned of the dangers of cigarettes in 1964, increasing federal regulation, excise taxes, and litigation have formed a formidable headwind. But the nearly insatiable demand of millions of smokers has allowed major tobacco companies to prosper. I am going to look today at four leading domestically focused tobacco related companies, to analyze whether their own momentum, or the legal regulatory momentum, will have the upper hand in the next few years.

SWM is a leading maker of papers and reconstituted tobacco for the tobacco industry. Its stock was trading recently at about $70 per share, toward the high end of its 52 week range of from $74.68 to $46.75. It has a price to earnings ratio of 12.8, and a market capitalization of $1.1 billion. It has maintained a quarterly dividend of $0.15 since 1997. The current annual yield is 0.9%

SWM continued its tremendous growth momentum in 2011. Earnings for the year came in at $92.6 million, or $5.46 per share. This compares with per share totals of $4.35 in 2010, $2.20 in 2009, and $0.04 per share in 2008. Impressive profit growth, I would say.

SWM, other than achieving both top and bottom line growth, has also found itself in courts regarding patent issues. It recently lost a round, but I have no concerns that the loss will affect SWM in a material way.

Analysts have been scrambling to raise quarterly and annual estimates on SWM in light of its stellar recent performance. The current earnings estimate is for $7.30 per share this year. Given this tremendous growth, and below average price to earnings ratio, it is not a surprise that SWM's 5-year PEG is 0.65. I see SWM as a classic case of a stock that has been overlooked by the market. It has had a great run since falling to as low as $12 per share in 2009, but even from this point, I expect this stock to double out to mid decade. Please investigate this equity further.

Altria is largely the domestic cigarette and tobacco business of the old Philip Morris. Therefore, it exists in a declining market rife with litigation and zealous regulation of its main product. It purchased smokeless tobacco maker U.S. Tobacco in 2010, which has helped to slow the rate of sales volume declines. Altria also owns a cigar maker and a winery, but those are small relative to its Marlboro led cigarette business. Altria stock was selling recently for between $29 and $30 per share, near the top of its 52 week range of from $30.40 to $23.20. It has a price to earnings ratio of 18, and a market capitalization of $60.4 billion. Its dividend has been raised 42 years in a row, and now stands at a quarterly $0.41, for a generous annual yield of 5.5%.

Altria posted a successful 2011. While revenues fell a little over 2% from 2010 to $23.8 billion, earnings, after adjustments for one time events, rose 7%, to $4.24 billion. Per share was up 8%, to $2.05 per share.

In addition to its generous and rising dividend, Altria also is engaged in what seems a never ending share buyback program. Altria repurchased nearly 50 million shares last year, and has about $670 million of repurchases scheduled for 2012.

Altria also has a $400 million cost reduction plan in place. But when it is virtually impossible to achieve organic growth, cost cutting carries one only so far. I see Altria as an appropriate stock for income seekers, but over the long run I expect the company and its stock to languish.

Lorillard was spun off in 2008 by its former parent, Lowe's Companies (LOW). Lorillard sells 43 different brands and sub brands of cigarettes, but some 90% of the company's sales are its flagship, Newport, and Lorillard is the nation's third largest cigarette maker. Lorillard stock was trading recently at a new 52 week high of about $129; its 52 week low is $76.01. It has a price to earnings ratio of 16, and a market capitalization of nearly $17 billion. It recently raised its dividend, as it has every year since the spin off. That quarterly dividend now stands at $1.55, for an annual yield of 4.9%.

Lorillard benefited from an unexpectedly strong fourth quarter of 2011. Excluding a positive legal settlement, adjusted earnings in the fourth quarter were $295 million, or $2.20 per share, a 26% improvement from the year earlier quarter. Analysts had expected fourth quarter earnings of $1.95 per share. For all of 2011, Lorillard earned an adjusted $1.1 billion, or $7.88 per share, a 16% improvement from the $6.78 per share recorded in 2010.

The FDA has undertaken a peer reviewed study on the effects of menthol, particularly on children and minority populations. The study has not been concluded, but appears aimed at the Newport Brand. Judging from the market, I doubt that the study will have a substantial negative effect on Lorillard.

In light of Lorillard's strong earnings, analysts have upped their earnings estimates on the stock in 2012 and 2013 to $8.84 and $9.85, respectively, and a five year, estimated PEG of 1.25. Growth potential obviously exists here, and with that generous dividend, this is my top choice among domestic cigarette makers.

Reynolds is the country's second largest cigarette maker, with brands such as Winston, Camel and American Spirit, among many others. Reynolds is 42% owned by British American Tobacco PLC, (BTI). Reynolds stock was trading recently at about $41 per share, near the high end of its 52 week range of from $42.18 to $31.82. It has a price to earnings ratio of 17 and a market capitalization of $23.5 billion. It recently raised its dividend to a quarterly $0.59 per share, for an annual yield of 5.8%

Reynolds reported earnings of $0.72 per share in the fourth quarter, a 12% year over year advance from the year ago quarter, but more importantly, three cents per share more than analysts had projected. Full year earnings came in at $2.81 per share, up 7% year over year. This earnings growth came despite essentially flat revenues year over year. Reynolds has an aggressive, three year, $2.5 billion stock buyback plan in place that also has begun to support per share earnings. Management forecasts a similar growth rate in 2012, and estimates full year earnings of within five cents of $2.96 per share.

Reynolds balance sheet is in fine shape, with debt at 32% of capital and over $2 billion of cash and cash equivalents. What it lacks is that one dominant brand like Marlboro or Newport. It is struggling to grow revenues, and it has a higher five year estimated PEG than Lorillard at 2.1. Analysts are lukewarm at a mean rating of 2.8, and that reflects my own attitude. The dividend is nice, but I do not expect much growth at all.

About the author:

StockCroc

I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.

I fundamentally analyze every business from the top down.

In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.

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